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Canadian Pork Producers Reboot

The Canadian hog industry is back to recovery mode. Those who have weathered the drought are ready to take on new markets.

“When you look at the big picture, the industry has been incredibly resilient,” notes Kevin Grier, senior analyst with the George Morris Centre, in Guelph, Ontario. The Canadian pork industry is about 25% smaller than it was in 2004, but the industry that survived is very competitive.

Feed costs have continued to escalate and further reduce profitability. But from the Canadian pork producers’ perspective, they are faced with a non-barrier tariff imposed by the United States through the mandatory country-of-origin labeling (COOL) law, he says.

Manitoba producers were hit hardest. In 2007, they exported approximately 5.5 million weanling pigs and 1.2 million market hogs to the United States. By 2012, those numbers dwindled to just over three million weanling pigs and 400,000 live market hogs.

The industry hopes that the growing demand for Canadian pork in Asia will one day dwarf the exports to the United States. In 2012, Canadian pork exports of fresh, frozen and chilled pork were just shy of the billion-dollar mark.

Prairie Landscape Changes

Big changes have come to the westernprovinces in recent months. Two large independent producers, Big Sky Farms, based in Saskatchewan, and Puratone, headquartered in Manitoba, were bought by two of the industry’s largest processors: Olymel and Maple Leaf Foods. In addition, Manitoba-based HyLife Foods sold 33.4% of its shares to Japan’s Itochu Corp.

Olymel’s purchase of Big Sky Farms was made official on Jan. 20, 2013, when the sale received the green light from the competition bureau. Olymel purchased breeding stock, feedmills, transport capacity and 21 barns spread across Saskatchewan from the receiver for CAN $65.25 million.

Olymel is a big player in the Canadian pork and poultry marketplace, explains Olymel spokesman Richard Vigneault, Montreal, Quebec. Pork and poultry slaughtering, processing and distribution facilities are located throughout Quebec, Ontario, Alberta and New Brunswick. More than 900 products are manufactured under Olymel’s national Olymel, Lafleur and Flamingo brands, plus producing private-label products for other companies. Total sales exceeded CAN $2.3 billion in 2011. About 50% of their pork production is exported.

This is Olymel’s first venture into raising hogs. Vigneault says Olymel will rely on Big Sky Farms’ expertise and dedication going forward. “We thought they were a very interesting company that had a lot of expertise in all aspects of the production of pork. They use the best management practices for animal welfare, environmental protection, feeding and so on,” he notes. Olymel will also draw from the extensive experience of parent company, La Coop fédérée, the largest agri-food company in Quebec.

The acquisition of Big Sky Farms was welcome news to the industry, which supplies about 20% of the hogs to Olymel’sRed Deer, Alberta, plant. “The fact that they bought it is good news for the prairies. It shows Olymel is willing to make a real commitment to remain a force in the region,” Grier says.

Vertical Integration

While vertical integration is new to Saskatchewan and Olymel, it is quite common throughout the sector, Grier adds. HyLife Foods of Manitoba, Conestoga Meat Packers in Ontario, and F. Ménard pork products in Quebec are other examples of vertical integration.

Maple Leaf Foods’ CAN $42 million acquisition of Puratone in November 2012 was less of a surprise. Even though Puratone had downsized in 2006, it was still producing about 18% of the hogs processed at its Brandon facility. Grier sees the Olymel and Maple Leaf Foods’ transactions as circumstantial and strategic. “Maple Leaf felt they couldn’t afford to have Puratone’s hogs go to HyLife or a U.S. packer, so that’s why they had to act quickly,” he says.

The purchase price is small enough that it wouldn’t impair Maple Leaf’s balance sheet or its ability to compete, according to Scotiabank analyst Christine Healy in an interview with the Financial Post.

Federal Agriculture Minister Gerry Ritz believes vertical integration offers a lot of benefits. “You can spread your costs across the full value chain — not just a particular link,” he comments.

The vertically integrated HyLife Foods serves as a good model in Manitoba, where it is integrated right through into a slaughter facility. And it has improved its genetics and developed markets to make sure it has what is required in markets such as Japan, he adds.

Japan’s Itochu Corp. is a key customer of HyLife Foods. Its purchase of one-third of HyLife is part of a strategy that will see the current annual production of 1.4 million pigs increase to meet the growing demand for pork in Asia. Itochu and HyLife also plan to focus on China, where pork consumption continues to grow.

Market Woes

Canada’s cost-competitive pork producers are astute managers, and they’ve had to weather many challenges in the past seven years.

Despite years of high and even record yields, cereal stocks are low. The growing interest in biofuels has swept up mountains of cheap grains that livestock producers had come to depend on. The result has been skyrocketing grain prices.

The increase in feed costs has greatly affected producers, says Gary Stordy, public relations specialist for the Canadian Pork Council (CPC). And, the stronger Canadian dollar has had a negative impact throughout the sector, not just on feeder pigs producers, he adds. Canadian prices are based on the U.S. base price, the conversion factor and foreign exchange values, so as the Canadian dollar fluctuates, so does the price.

The CPC promotes the use of business management tools, such as hedging corn or hog prices, to allow producers to move forward with their business plan. “These are tools that are used more frequently in the United States than here in Canada,” Stordy explains.

The industry was starting to adjust in 2009, when H1N1 (aka swine flu) swept across the world. The name confused consumers, some mistakenly thinking they could contract the H1N1 virus by eating pork products. Sales tanked and prices remained low for yet another year.

Despite it all, the remaining hog farms in Canada were back in recovery mode in 2010 and were profitable going into 2012, Grier points out. But last summer’s drought, which settled over more than half of the continental United States, also impacted Canadian feed costs.

“I’m being facetious, but the industry got word that it wasn’t raining, and corn futures went from about U.S. $4 to nearly U.S. $8/bu. in a very short period of time,” Grier says. Livestock producers facing higher-than-expected feed costs found it difficult to weather the storm, as they had lost much of their equity in the earlier downturn.

Big Sky Farms and Puratone are some the higher-profile casualties of the drought. “It was just too much, too soon for them,” Grier explains.

Offsetting the Downturn

U.S. producers expanded their hog production over the past 10 years and captured a portion of the Canadian market.

“They’ve gone from a net importer to a global exporter of pork, so our market looks pretty good to them,” Grier comments. “We’re close. We have the same tastes and it’s become an important market, plus they’re the most efficient pork-producing system in the world.”

He feels the only means of reversing the trend is for Canadian packers to become more competitive — not something he sees as achievable in the short term.

Domestic pork consumption is the lowest it’s been since the early 1980s and represents about 45 lbs. per capita, despite the trend of bacon-flavored food items, pulled pork and barbecued ribs in Canada.

Beef consumption has held relatively steady over the past decade at about 60 lbs. per capita, but chicken remains the favorite meat protein, reaching almost 70 lbs. per capita, according to the latest numbers supplied by Agriculture and Agri-Food Canada.

Canada’s Advantages

Grier believes Canadian producers have distinct advantages over the rest of the world’s pork-producing nations because of the vast expanses of arable farmland, abundant water supply and the fact livestock production is spread over such a large area. “We don’t have a lot of the problems the Americans have in terms of human population conflicts and animal densities,” he says.

Social acceptability of pig production is more of an issue in Quebec and Ontario because they are more densely populated. Efforts to protect air, water and soil quality have been introduced in Quebec in recent years. Awareness campaigns on animal welfare and sustainable farming practices are slowly proving to be effective. In terms of carbon footprint, a commissioned study showed theirs is 10% less than in the United States and 37% less than in the United Kingdom.

“Environmental regulations wouldn’t allow 5,000-sow barns here,” says David Boissonneault, president of the Quebec Federation of Pork Producers (QFPP). The average-size farrow-to-finish operation in Quebec has just 225 sows. What they lack in size they make up in numbers; there are 3,500 hog producers in Quebec, twice as many as in the neighboring province of Ontario. Quebec producers sold 7.2 million hogs in 2012.

The QFPP is confident about the future of the industry and has taken a bold approach to manage biosecurity and animal health. It’s also significantly increased its presence on the domestic market with three of Canada’s major grocery chains, which Boissonneault describes as “keys to success.” While Quebec hog producers seem to have weathered the latest storms better than their counterparts in other provinces, they still carry an average debt load of 44%. They also must pay high premiums into their insurance program (ASRA, the French acronym for Canada’s Farm Income Stabilization Insurance Program), which is not factored into the cost of production, he notes.

Producers in most regions have the advantage of being able to grow their own feed. “We’re lucky. Producers have some options compared to the U.S. Midwest,” Stordy says.

Focus on Pork Exports

Canada exports to more than 120 countries, year over year, including the United States, Japan, Russia, China, Australia and Mexico. The CPC says it plans to access the European Union (EU) market and remains hopeful that it will be able to regain market share in South Korea once a bilateral free trade agreement is signed.

Still, the current tariff relief from the South Korea-U.S. trade agreement, effectively lowering the price of U.S. pork imports in South Korea, makes Canada a secondary supplier and places it at a disadvantage in terms of time to access that market, Grier says.

The export market played a huge part in Olymel’s decision to buy Big Sky Farms. “We needed to secure our supplies if we were going to enter these markets, and that was the main purpose of our move with Big Sky Farms,” Vigneault explains. Its 42,000 sows in western provinces will allow it to ramp up production in no time, he adds.

Procurement isn’t an issue in Quebec. Under the current marketing agreement between Quebec pork producers and processors that came into effect in 2010, each abattoir works with an assigned number of producers in order to meet its slaughtering capacity. A good indicator that the system is working is that fewer hogs arrive at the slaughterhouse with full stomachs, an indication that producers are focused on efficiency.

COOL Dispute

Manitoba’s hog industry flourished after the abolition of the Crow’s Nest Pass grain transportation subsidy in 1995. The province was awash with cheap grain and ready to respond to the increased demand for high-quality feeder pigs and weanlings in the U.S. Corn Belt.

Manitoba Pork Council general manager Andrew Dickson, also with The Western Producer, notes the number of feeder pigs exported from Manitoba has been cut in half since mandatory COOL was enacted. This has put weanling pig producers in a very difficult situation, with few alternative markets for the million weanlings that had been sold to Minnesota and Iowa hog producers. They can’t be absorbed internally, because Manitoba has a moratorium on the construction of new feeder barns. Other provinces aren’t able to accommodate the extra pigs, either.

As bad as the weanling market is, slaughter hog exports are doing even worse. Numbers have shrunk from one million head to about 165,000 head/year. But the infrastructure remains in place, and the CPC is confident that production could be ramped up if conditions were warranted. “American producers are interested in our weanlings. If the mandatory COOL dispute is resolved, we’ll be in position to supply them,” Stordy says.

In February, a Canadian delegation of pork industry representatives met with the National Pork Producers Council (NPPC) and U.S. legislators in Washington, DC, to convey the message that Canada expects the United States will comply with the World Trade Organization (WTO) ruling to amend the COOL legislation, which it believes discriminates against Canadian and Mexican livestock. The deadline is May 23.

Grier doesn’t think that’s going to happen because the Obama administration is not taking the issue seriously. “They think COOL is a good thing,” he says, noting the proposed U.S. response to the WTO bears this out.

The new COOL rules eliminate the label that identifies meat as being either a “product of Canada” or a “product of the United States” and replace it with a label that would reflect each stage of an animal’s life. The proposed changes would affect slaughter hogs, feeder cattle and breeding stock. In order to comply with these regulations, the processing chain would need to increase its recordkeeping. Packers would have to reorganize their plants to keep production of U.S. meat segregated from Canadian meat, thus creating yet another label for animals with mixed histories. Canadians fear the logistical headaches this would create might prompt some American plants to stop buying Canadian pigs altogether.

Canadian hog producers are outraged by the labeling plan. They view it as a disguised non-tariff barrier. A CPC report, prepared by economist Ron Giest and released in January 2013, states that U.S. COOL regulations are costing the Canadian pork industry U.S. $500 million a year. Direct impacts on hog producers, calculated from official live trade data, amount to more than U.S. $ 1.9 billion as of October 2012, and were expected to exceed U.S. $2 billion by the end of 2012. Overall, Giest estimates an additional U.S. $357 million in pork trade has been lost since the implementation of COOL, plus a price suppression of U.S. $85 million in the feeder pig trade.

“In the event the United States does not come into compliance or find resolution to the COOL dispute, the report’s findings that the current annual rate of damage accumulation is almost U.S. $500 million can be used to estimate retaliatory tariffs on U.S. exports to Canada,” states CPC’s ChairmanJean-Guy Vincent. “Faced with continuing damages measured in tens of millions of dollars a month, Canada’s pork industry would prefer a timely resolution to the dispute and an end to the damaging trade restrictions as soon as possible,” he concludes.